It is often asserted (also here; critiques here & here) that recent massive increases in the Fed’s balance sheet carries a significant risk of future inflation, since the Fed may find it impossible to wind down the balance sheet in a timely manner. Woodward & Hall rightly note, however, that even if inflation becomes a problem (e.g., via an unexpected increase in monetary velocity), the Fed could keep its monetary base large, and simply increase interest rates on banks’ excess reserves. This, in turn, would reduce velocity by inducing banks to keep such reserves on deposit in the Fed (instead of lending them out). Hence, it isn’t necessarily the case that massive Fed holdings of potentially illiquid assets may end up hindering its ability to conduct monetary policy.

It’s encouraging to note Robertson’s finding New Zealand was able to keep reserve levels high by paying interest on said reserves. Somewhat less encouraging is Beckworth’s observation that paying interest on excess reserves could be quite costly; but this, IMHO, is not fatal – merely something to consider.

TARP v. RTC, Accounting Edition: “The last great experiment in working through financial crisis took longer than expected, involved some accounting pushing and shoving at the outset, confronted a skeptical Congress, and cost more than initially projected, but quite a lot less than feared.”